RADA Electronic Industries Ltd.
Q1 2020 Earnings Call Transcript

Published: 19 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries First Quarter 2020 Results Conference Call. All participants are present in a listen-only mode. Following managements' formal presentation, instructions will be given for the question-and-answer session. As a reminder this conference is being recorded.You should have all received by now the company's press release. If you have not received it, please contact RADA's Investor Relations team at GK Investor & Public Relations at 1-646-688-3559 or view it in the News section of the company's website, www.rada.com.I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, please go ahead.

[Ehud Helft:]

Thank you, operator. I would like to welcome all of you to this conference call to discuss RADA's first quarter 2020 results. I would like to thank RADA management for hosting this call. With us on the call today are Mr. Dov Sella, Chief Executive Officer; and Mr. Avi Israel, Chief Financial Officer.Dov will summarize the key highlights of the quarter followed by Avi who will provide a summary of the financials. We will then open the call for your questions. Before we start, I'd like to point out the Safe Harbor published in today's press release also pertains to the content of this conference call.And with that, I would now like to introduce RADA's CEO, Mr. Dov Sella. Dov, go ahead please.

[Dov Sella:]

Thank you, Ehud and good day to our call participants. First, I would like to wish everybody who continues to suffer from the coronavirus everywhere a speedy recovery.Here in Israel we are beginning to ease up. Shopping malls are open, kids have returned to school, and businesses are beginning to bring employees back; however, with continued and careful social distancing restrictions. I hope this reality will be behind us soon globally and now let's discuss our results.Let's start with the results summary. As you can assume after maybe reading the press release, we are very pleased with our financial results for this first quarter of 2020. We showed 73% of growth in revenues year-over-year. Our gross margins are stable for quite a while now and we have a surplus profitability which is actually -- the timing is ahead of our expectations.The corona pandemic had no material financial impact on RADA. A few weeks ago, we discussed the steps we have taken to protect our workforce. So, I will not detail them again now. But I want to highlight that in both Israel and in the U.S., our companies are defined as part of the defense industrial base which means that we are a critical enterprises in both countries we operate in.And this enables us to continue working at full capacity and also enabled us in the last two months as long as we keep our employees safe and adhere to regulations and that's what we did.As our strong results prove, we have successfully adapted and have overcome the work challenges that the pandemic has presented us with. Our manufacturing was and is uninterrupted. Our new facility in the U.S. is up and running and we are ramping manufacturing there.Deliveries to U.S. customers from our U.S. production line have started. Manufacturing in our Beit She'an facility in Israel also continues uninterrupted. And to-date, all our deliveries to customers have been as planned with minimal interruptions.We reiterate our revenue guidance for 2020. While we have issued our guidance before the coronavirus pandemic affected the global economy, we continue to stand behind our guidance, which is over $65 million of revenue for this year, representing growth of close to 50% year-over-year.Looking ahead, we continue to expect sequential quarterly revenues growth throughout this year and maybe -- and probably into 2021. And from what we have in our backlog quarter number two is on track as well.Our balance sheet has never been stronger. We have over $32 million in net cash, which is more than enough for our working capital needs as of now and also into the future. It allows us to maintain significant inventories in order to meet current and future expected growth in customer demand and it is more than enough to continue to invest in our growth whatever the economic situation will be in the coming months.Let's talk a bit about business development. Like everybody else, we are still not traveling out of country to meet existing and potential customers and partners face-to-face. We rather meet virtually by video and phone. Because all are in the same boat so to speak, this type of remote business development is currently the industry standard.On a -- regularly our sales cycle tend to be long-term about a year if not more sometimes. So it is not possible to tell in the short-term whether not meeting face-to-face has any meaningful impact. However, the need for our life-saving solutions for the armed forces is very clear and solid and is the modern and urgent defense need.We have not heard from existing and potential customers let's wait and see post-pandemic. And our end markets continue to move ahead without a pause. Hence we believe that the potential delays in business development activity that the situation may impose on us are recoverable and will not have a long-term effect on our business.In fact, we are finding that work processes sometimes are getting quicker and more efficient probably due to less override as a result of work at home and time for efficient administrative work by our end customers and also the integrators. We also experienced the scheduling of meetings is simpler. There are no travels and lost time as a consequence and people seem to be more available.There are natural concerns about macroeconomics and allocation of defense budgets as a result to the coronavirus situation. So far we have not seen any cancellation of existing orders. And in fact, we have continued to get new orders in good pace. While right now the global macroeconomic outlook at least for 2020 seems dead, defense spending is a government expense, which is generally less exposed to the macro-economy to our belief and to our experience.We expect that huge economic stimulation packages in the U.S., Israel and elsewhere will follow in part -- will flow in part to defense spending. As this has a positive impact on employment and economic activity in general, and since we are addressing new markets and modernization needs, we believe that programs we are involved with will not be those that potential will suffer from any potential future decrease in defense budgets, if that will happen.Let's talk a bit about our markets and customers. In our relevant markets, the interest and need as we said just now for the solutions in which we are – our radars are a key part is global. Considering the addressable market size, we believe this is just the beginning of a sustained growth period.Our strong growth in sales demonstrates the transition of our end markets from the initial stage to the serial production stage. We see programs moving from fulfillment of urgent needs to multi-year acquisition programs. We expect that, it will enable us to start building backlog in the coming months, and to establish growth also in 2021 and beyond.As many of you know, we are currently targeting a number of such programs. First, we believe that the market for our radars for active protection systems is in the region of a total of $3 billion in the coming decade, split evenly between the U.S. and the rest of the world. In this market, we are part of IMI/Elbit Iron Fist active protection system, which was selected by the Israeli government for the Eitan AFV and is in process of being installed on the U.S. Army's Bradley IFV. That's for the APS.The short-range air defense market we cater to, we estimate will be about $2 billion market over the coming decade also split evenly between the U.S. and rest of the world. We are currently serving the U.S. Army IM-SHORAD program with potential of 144 vehicles. We are also providing systems to the Marine Corps – U.S. Marine Corps ground-based air defense program.In addition to APS and the short-range air defense to the maneuver forces, recently base and point defense have been becoming a clear need and this has been – since the hostile attacks in the Middle East by Iran, and on U.N. bases in Africa by ISIS, and some more examples in the last few months.Beyond what has been delivered to date, we see significant upside from follow-on orders to the initial orders and our pipeline continues to broaden with promising prospects. And potential orders are especially strong in the U.S., while other international markets are increasingly growing.So let's summarize. First I want to reiterate what we said a few weeks ago, as everything I talked about then is evident from our strong results as published today. We are showing a revenue growth of 73% year-over-year quarterly and revealing the profitability potential of our business earlier than we expected. From the perspective of operations and performance, as of today we are on track for 2020, supply chain is active and productive and the overall business continuity of RADA is very good.From the perspective of our markets, defense is a critical industry, less exposed to an economic downturn. Furthermore, we see defense budgets generally growing or at least stable mainly in the U.S., as part of the government economic stimulus. The need for our products amidst this unusual period is very -- is a reality to the military -- and the recent attacks on U.S. troops in Iraq and other places prove that.In summary and despite, the pandemic these are exciting times for us. Finally, we'll start to see and enjoy the fruits of our investments over the past few years. In view of the opportunities ahead of us, RADA is positioned for significant growth and the investment in our production infrastructure both in the U.S. and Israel are stabilized now.We have a strong balance sheet with over $32 million providing us with more than what we need as working capital and the ability to capitalize on the opportunities ahead of us. And our leading radar technology, which keeps evolving addresses the demanding needs of these growing market for the coming years, while we are currently developing our next generations, which should keep us in the lead for a few years to come. And finally, we can confidently say that things have never been -- have never looked better for RADA.I'd like now to hand over the discussion to Avi Israel, our CFO. Avi please?

[Avi Israel:]

Thank you, Dov. Good morning and good afternoon to all of our participants and thank you for joining us today. You can find our results on the press release we issued earlier today, and I will provide a short summary of the first quarter results.First quarter revenues were at a record of $15.1 million, up 73% year-over-year. Our gross margin in the quarter was stable 36% of revenues and has not changed over the past few quarters. This is the level we are currently expecting and are happy with.As you know, we made significant investment last year especially in R&D and marketing and sales, as well as our infrastructure in the United States, so our operating expenses grew. However, looking ahead, we expect operating expenses to be stable at around the current quarter's level throughout 2020.While we reported that we expected surplus profitability at some point during 2020, we achieved it earlier in the first -- already in the first quarter. Operating income was $46,000 in the quarter, compared to operating loss of $558,000 in the first quarter of 2019. Adjusted positive EBITDA was $863,000, compared with a negative one of $26,000 in Q1 of last year. Net income attributable to RADA's shareholders in the quarter was $170,000, compared to a net loss of $485,000 in the first quarter of 2019.I would also like to summarize and point out some highlights from our balance sheet. As of March 31, 2020, we had $32.1 million in cash and no financial debt at all. On January 10, 2020, we significantly strengthened our balance sheet by raising approximately $23.5 million from investors after expenses in a secondary offering in the United States. At quarter end, our shareholders' equity stood at $65.4 million financing 72% of our balance sheet.In summary, as Dov mentioned, and as the financial results demonstrate, we are very pleased with our progress and are on track. That ends my summary.We shall now open the call for questions. Operator, please.

[Operator:]

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from Ken Herbert of Canaccord. Please go ahead.

[Ken Herbert:]

Yes. Hi, good morning or good afternoon, Dovi and Avi, very nice quarter.

[Dov Sella:]

Thank you.

[Avi Israel:]

Thank you.

[Ken Herbert:]

I just wanted to first ask Dovi, you've made some positive comments on the short-range air defense the SHORAD market with activity near term. Can you just provide an update of some of what you're seeing specifically on the GBAD procurement with the Marine Corps and then of course, the vehicles with the U.S. Army? And any change to your expectation of timing this year?

[Dov Sella:]

We assume that both these programs will materialize into backlog this year. And the revenues will be in next year. And this has not changed.

[Ken Herbert:]

So you're expecting a contract, I think it was some time in the third or fourth quarter, that's still the expectation?

[Dov Sella:]

Yes.

[Ken Herbert:]

Okay. Great. And then if I just could Avi, just your comment on operating expenses OpEx. So you about $5.3 million in the first quarter, I'd assume maybe some credit, as we go through the calendar year on marketing and selling maybe but it sounds like based on your comments, the research and development and G&A expense should hold at the first quarter levels roughly?

[Avi Israel:]

Yes, you're correct. And if – I would like to draw your attention to the OpEx level of Q4 of last year, which was well above $5.1 million. So we are stabilizing our OpEx, as you mentioned.

[Ken Herbert:]

Yes. Okay. Very good. And how do we think about the EBITDA margin for this year? I know, obviously, a lot of that will depend on holding gross margins sort of steady but I'm assuming you expect to be able to hold gross margins steady which means a lot of the incremental margins and if OpEx is steady we should see an acceleration in the incremental margins on the top line.Is there anything else that we should be aware of or we should think about in our model that could perhaps impact the margins or any of the risk as you think about margins through the progression of 2020?

[Avi Israel:]

Nothing significant.

[Ken Herbert:]

Perfect. I’ll stop there and pass it back. Thank you very much.

[Dov Sella:]

Thank you.

[Avi Israel:]

Thank you, Ken

[Operator:]

Your next question is from Brian Kinstlinger of Alliance Global Partners. Please go ahead.

[Brian Kinstlinger:]

Great. Thank you. Inventory is building nicely almost at $20 million. Can you break that down between Israel and the U.S.? And are there any additional challenges on shipments from Israel? And as a second question, moving forward, do you expect all inventory, that's going to be shipped to the U.S. customers will be coming from your new Maryland facility once that inventory from Israel is shifted to Israel [ph]?

[Avi Israel:]

What you see in our financial statement is consolidated inventory. Obviously, most of it is in Israel because the U.S. production is ramping up only recently. We share supply chain channels between the two entities and I hope that answers your question.

[Brian Kinstlinger:]

Okay. I'm just curious are there any delays in shipments? How – is it taking any extra effort to ship given any restrictions in place?

[Avi Israel:]

Up until today we haven't faced any delays and any restrictions not from Israel nor from the U.S. So no up until now, throughout this corona period, we haven't faced any challenges that we cannot overcome.

[Dov Sella:]

Yeah, there were a few things that we had to shift a bit in a day or two, but nothing significant. And just to complete your questions, we do believe that since starting now these days and onwards the U.S. consumption will be satisfied by our U.S. production plant.

[Brian Kinstlinger:]

Yes. And then can you break down revenue by geography? And then talk about -- you've talked a good amount about the U.S. driving growth, are you seeing growth and progress in international yet, or is it more just anecdotal pipeline improving and not yet revenue?

[Dov Sella:]

The U.S. is not surprisingly about 50% of our current revenues and this is steady stable. And that's what we assumed. Israel and the Israeli integrators are another 25%. And the rest is mostly coming from Europe, which is a growing segment for us. And also here, it's both for European end users and through integrators to other parts of the world but we count it as Europe.

[Brian Kinstlinger:]

Great. I'm curious during the first quarter of 2020, if there was any significant contribution from advanced protection system programs. I know there's been news and you just said even on the call, there's been news on the Dutch CV90 and then the Israeli Eitan and D-9. Have we seen any revenue from that yet? And if not when do you expect that to begin to ramp?

[Dov Sella:]

Yeah. We continuously say that active protection will start being -- affecting our top line only in 2021 and also gradually. So far it is development winning programs testing that kind of thing.

[Brian Kinstlinger:]

Okay. Can you highlight the bookings in the month of April? And then can you remind us in terms of, you booked $16 million of orders during the first quarter of 2020. What's the typical turnaround between orders and shipments in general?

[Dov Sella:]

This is typically something like six months at the most. Sometimes it is a bit more. But typically this is the turnover period. And this is why we said when we released the notes that we expect to deliver everything this year.

[Brian Kinstlinger:]

Yes. And do you have April bookings, can you share those yet?

[Dov Sella:]

Not now. We will do it once we consolidate and we do it when we feel that it is a significant announcement to make.

[Brian Kinstlinger:]

Okay. Thank you.

[Dov Sella:]

Thanks.

[Operator:]

The next question is from Austin Moeller of Canaccord. Please go ahead.

[Austin Moeller:]

Good morning, Dov and Avi.

[DovSella:]

Hi, Austin.

[Austin Moeller:]

Hi. I just had a quick question about the deliveries that you announced with your relationship with Ascent Vision to -- the customer was an undisclosed U.S. customer right?

[Dov Sella:]

We are not disclosing customers yet basically.

[Austin Moeller:]

Okay. Is that Ascent Vision --are those deliveries that you announced relevant to the second quarter specifically or the third quarter?

[Dov Sella:]

Actually the Ascent Vision deliveries of ours were made last year.

[Austin Moeller:]

Okay. And then as far as the IM-SHORAD program goes, can you quantify how many of the radars have rolled-off the line and been delivered to the prime contractor yet on that? And what the ramp looks like on that?

[Dov Sella:]

Currently we are in the phase of prototypes. We have delivered seven sets, which is 28 radars, maybe 30 with some spares. We are delivering soon another set of four. But these are prototype sets. And as we mentioned in the discussion, we expect to get the several production orders later this year. We do assume that about half of the program potential will convert into revenues next year, which is 144 vehicles divided to two, and then multiplied by four.

[Austin Moeller:]

Okay, great. Thank you.

[Operator:]

[Operator Instructions] The next question is from Nahum Masochist [ph]. Please go ahead.

[Unidentified Analyst:]

Yeah. How are you doing? Thank you very much and congratulations for the great quarter.

[Dov Sella:]

Thank you.

[Unidentified Analyst:]

Dov, I wanted to ask you, when did you get the ISO certification?

[Dov Sella:]

ISO? So you mean for the U.S.?

[Unidentified Analyst:]

Yes.

[Dov Sella:]

Formally last week; un-formally three weeks ago.

[Unidentified Analyst:]

Okay. Okay. That's good. And the second question is, last year you said, you're going to develop four new radars. In the meantime, actually you revealed two of them, and I wanted to know when are you going to rebuild the other two, the rest?

[Dov Sella:]

In a year from now.

[Unidentified Analyst:]

A year from now, the next two?

[Dov Sella:]

Yeah.

[Unidentified Analyst:]

Okay. That’s helpful. Thank you very much. Thank you.

[Dov Sella:]

Sure.

[Operator:]

There are no further questions at this time. Mr. Sella, would you like to make a concluding statement?

[Dov Sella:]

Yes. Thank you, operator. On behalf of the RADA management, I would like to thank you for participating in our call and the interest in our business. I do wish a speedy recovery to all those affected by the pandemic, and I thank the health workers globally for their efforts in combating this pandemic.We look forward to speaking with you and updating you again in our second quarter results release, which is going to take place in approximately three months time. We wish you to stay well and good day to all of us. Bye-bye.

[Operator:]

Thank you. This concludes the RADA Electronic Industries first quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.